Investment Ratios Flashcards
Earnings per Share
= profit attributable to ord shares
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Number of ord shares in issue
What is earnings per share:
The profit after Corp tax and pref dvds is used in the calcn of this ratio because it represents the profit available for distribution as dvd to ord s/holders.
It represents the amt in pence the co. has earned during the year for each ord share.
The trend in EPS over time indicates growth or otherwise in profit attributable to each ord share.
Dividend Yield:
= Net dvd per share
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Current share price
X 100
Ratio shows what an investor receives as a % of what they have to invest (mkt price)
Low dvd = indicates overvalued share price or ability for high growth
High dvd yields indicate low growth or underrated share price
Measures the relationship between the net income from a share and its price.
Measures the ord s/holders annual return on investment, and may be compared with what could be obtained by investing in some other company.
DVD Cover
= earnings per share
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DVD per share
Represents the number of times a dvd is covered by earnings and indicates how likely it is that the company will be able to maintain future dividends on ord shares at their current level if profits were to fall in future years …
Payout Ratio = inverse of dvd cover
= dvd per share
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Earnings per share
Represents the % of profit that has actually been distributed as a dvd to the ord s/holders.
A high ratio may not be sustainable if profits go down, whereas a low payout ratio indicates that a Co. is primarily focused on retaining its earnings rather than paying out dvds.
Low ratio indicates growth companies i.e reinvesting
Price Earnings P/E Ratio
= current mkt price of share
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Earnings per share
Mkt view of the earnings growth potential of the co. They should only be used to compare Co’s in the same sector.
If Co. P/E ratio higher than the average for and industry sector = high demand for shares. The shares will be relatively expensive, but the investors would expect to be compensated by higher than average earnings in the future.
A lower ratio than average suggests that the co. Is not greatly favoured by investors/have poor growth prospects
Price Earnings Growth (PEG)
= PE Ratio
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Earnings Growth %
- Helps determine stock value while taking the Co. Earnings growth into a/c
- provides a more complete picture than the P/E ratio on its own
- lower the PEG ratio, the more the stock may be undervalued, given its earnings performance.
- so under 1 means shares may be undervalued, so attractive
- over 1 usually a sign that the share is overvalued.
Net Asset Value - (NAV)
= total net assets attributable to ord shares
———————————————-
No. of Ord shares in issue
Net Assets = Total Assets - total liabilities - value of pref shares
A share would normally be expected to sell at a premium to its NAV, as investors would be willing to pay something for goodwill ie … the Co’s Mgmt, expertise and reputation
Return on Capital Employed (ROCE)
= Profit b/4 Interest & Taxation
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Capital Employed
Capital Employed = ord s/holder fund (including reserves) + LT Debt
LT Debt = > 12 mths debt plus any pref shareholder value being used to finance productivity
ROCE measures the return being achieved on capital employed in the business, so helps show how well the Co. assets are being used to make money AND how well costs are being managed.
Return on Equity (ROE)
= net profit after taxation & pref dvds
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Capital & Reserves (s/holders’ funds)
ROE measures the % rate of return the Co. is achieving on the investment funds provided by s/holders, which come from share purchase as well as retained earnings.
Retained earnings = earnings accumulated over the yrs from profits NOT PAID OUT AS DVDS, these will be shown in the profit and loss section of the balance sheet as reserves.
Indicates how efficiently a company’s mgmt has utilised the s/holders funds. …. therefore, purely on equity….
Price to book ratio
P to B ratio = share price
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NAV per share
NAV per share
= total net assets attributable to ord s/holders
————————————————————-
No of ord shares in issue
Price to book ratio indicates how much s/holders are paying for the net assets of the company
Liquidity Ratio aka quick test or an acid test
= current assets - stock
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Current liabilities
vs ….. Current Ratio = current assets
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current liabilities
Liquidity Ratio is a more cautious ratio as only measures those assets that can be liquidated quickly and definitely turned into cash
Liquidity in general should be 1
Current Ratio - stock is included
Typical Ratio should be btwn 1.5 - 2 but depends on type of business and prevailing economic conditions
A low ratio may indicate potential insolvency
A high ratio may mean a business may have too much working capital which usually means that assets are not being used as profitably as they might be
